NN Q3 2026 Earnings Call Transcript

Quartr
Provided by Quartr
October 29, 2026

Key Takeaways

  • Positive Sentiment: Q3 results exceeded the prior-year period, with net sales up 26% to $131 million and adjusted EBITDA up 50% to $18.5 million. Year-to-date sales rose 19% and adjusted EBITDA increased 40%, supported by stronger mix, operating performance, cost reductions, and higher China joint-venture income.
  • Positive Sentiment: NN raised its 2026 guidance to $480 million–$500 million in revenue and $64 million–$68 million in adjusted EBITDA, while increasing its new-business-win target to $110 million–$130 million. Management also outlined longer-term targets of $625 million in 2029 revenue and $87 million in adjusted EBITDA, though these remain forward-looking objectives.
  • Positive Sentiment: The company reported strong momentum in data centers, defense electronics, medical equipment, and electric-grid applications. Data-center sales reached a $35 million run rate from virtually zero early last year, while liquid-cooling capacity is being expanded and new defense and robotic-surgery medical programs are ramping.
  • Positive Sentiment: NN eliminated its remaining $35 million of preferred stock through a PIPE transaction, capturing a $5 million discount and reducing pro forma net debt and preferred stock from $261 million at year-end 2025 to $139 million. Management said the improved balance sheet provides greater flexibility to fund growth and pursue selective acquisitions.
  • Negative Sentiment: Management acknowledged that some legacy automotive programs generate little or no gross margin and tie up working capital, and it plans to reprice or gradually exit portions of that business. This could limit reported revenue growth in the near term, while new-program ramps remain dependent on equipment lead times, customer demand, and successful execution.
AI Generated. May Contain Errors.
Earnings Conference Call
NN Q3 2026
00:00 / 00:00

There are 9 speakers on the call.

Operator

Hello, everyone. Thank you for joining us, and welcome to the NN, Inc. third quarter earnings call and webcast. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Joseph Caminiti, Investor Relations. Joseph, please go ahead.

Speaker 1

Thank you, Christine. Good morning, everyone, and thanks for joining us. I'm Joe Caminiti with NN, Inc.'s Investor Relations team, and I'd like to thank you for attending today's earnings call and business update. Last evening, we issued a press release announcing our financial results for the third quarter ended September 30, 2026, as well as a supplemental presentation, which has been posted to the investor relations section of our website. If anyone needs a copy of the press release or the supplemental presentation, you may contact Alpha IR Group at nnir@alpha-ir.com. Joining us from NN management today are Harold Bevis, President and Chief Executive Officer, Chris Bohnert, Senior Vice President and Chief Financial Officer, and Chief Operating Officer, Tim French will be joining us for Q&A. Please turn to slide 2 where you'll find the forward-looking statements and disclosure information.

Speaker 1

Before we begin, I'd like to ask that you take note of the cautionary language regarding forward-looking statements contained in today's press release, supplemental presentation, and in the risk factors in the company's annual report on Form 10-Q for the third fiscal quarter ended September 30, 2026. The same language applies to the comments made on today's conference call, including the Q&A session, as well as the live webcast. Our presentation today will contain forward-looking statements regarding sales, margins, inflation, supply chain constraints, foreign exchange rates, tax rates, acquisitions and divestitures, synergies, cash and cost savings, future operating results, performance of our worldwide markets, general economic conditions, and economic conditions in the industrial sector, including the potential impacts and ramifications of tariffs, the impacts of pandemics and other public health crises and military conflicts on the company's financial condition, and other topics.

Speaker 1

These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside of the company's control, which may cause actual results to be materially different from such forward-looking statements. The presentation also includes certain non-GAAP measures as defined by SEC rules. A reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and supplemental presentation. Please turn to slide 3, and I will now turn the call over to our CEO, Harold Bevis.

Speaker 2

Thank you, Joe. Good morning, everyone. We had a pretty eventful quarter in the last four months, and we're going to recap our results for you. I want to start off by saying that we had a great Q3, and the results show significant progress with strong momentum continuing into 2027. Our Q3 net sales increased 26% year-over-year. Our Q3 adjusted EBITDA increased 50% year-over-year, bringing us to Q3 year-to-date, net sales up 19% over the same period prior year. Our Q3 year-to-date adjusted EBITDA up 40% year-over-year. So we're getting the flow-through that we want to on that incremental sales growth. We also have secured $106 million of new business awards during this year in the first nine months.

Speaker 2

We have a strong-looking fourth quarter as we close out the fiscal year, and the momentum is building, setting up an even stronger 2027. Turning on to slide 4, I wanted to just highlight the key messages for today's session. Number one, our sales are growing, and we are increasing our profits. Number two, we're winning new business, both for immediate launch in 2026, as well as securing launches for 2027 startup and 2028 startup. We are increasing our gross margin rates and our adjusted EBITDA margin rates. It's leading us to be comfortable to raise our guidance again for 2026 and creating solid momentum going into 2027. With that, I'd like to turn it over to Chris Bohnert, our CFO, for a moment to review the company's financial results more at a lower level of detail. Chris?

Speaker 3

Thank you, Harold. Good morning, everyone. If you're following along, I'm on slide 5. I'll talk about our financial results and key metrics for the quarter and year-to-date through 9/30/2026. Third quarter net sales were $131 million, up $27.2 million or 26% versus the prior year period, primarily driven by higher selling prices reflecting the increase in raw material costs and higher volume. Year-to-date through the third quarter of 2026, net sales were $378.3 million, up $60.8 million or an improvement of 19% compared to our results through the third quarter of 2025, continuing the momentum established across the previous quarters. Third quarter adjusted gross margin dollars of $25.3 million are up $5.8 million or 30% versus the prior year third quarter. This growth continues to be supported by a stronger mix of sales and new business launches.

Speaker 3

Across the first three quarters of the year, adjusted gross margin dollars of $74.5 million are up $16 million or about 27%. These results also reflect solid adjusted gross margins of 19.3% in the third quarter and 19.7% year-to-date, increasing 50 basis points and 130 basis points, respectively, compared to the prior year periods. Third quarter adjusted EBITDA of $18.5 million increased by $6.1 million, an increase of 50% versus last year's third quarter. This growth was primarily driven by improved sales mix, better operating performance, and higher income from our joint venture in China. Across the first three quarters of 2026, total adjusted EBITDA of $50.6 million is up $14.5 million or 40% versus the first three quarters of 2025. This strong growth in our profitability measure has been driven by similar drivers as in our quarterly results.

Speaker 3

The adjusted EBITDA growth has come with an improvement in our margin capture as third quarter adjusted EBITDA margins of 14.1% of sales expanded by 220 basis points versus last year's third quarter. On a year-to-date basis through the first three quarters of 2026, adjusted EBITDA margins of 13.4% are up by 200 basis points versus the 11.4% across the first three quarters. Now I'll turn to our segments starting on slide 6. First, in our Power Solutions segment, where our business consists largely of stamped and plated products, net sales for the quarter were $63.2 million, up 41% compared to $44.9 million in the prior year period. This growth was driven by increased volumes and higher selling prices, reflecting the pass-through of increased raw material costs, particularly precious metals.

Speaker 3

For the third quarter to date, Power Solutions generated net sales of approximately $180.9 million, compared to $133.1 million in the prior year period, an increase of 36%. Power Solutions' quarterly adjusted EBITDA was $13.4 million, an increase of $4.5 million or 51% compared to last year's third quarter of $8.9 million. The improvement was driven by stronger operating performance resulting from higher selling prices and volumes, along with the continued benefits of our cost out initiatives. It's worth noting that we continue to operate in an inflationary raw material environment, particularly across precious metals. As we've discussed previously, there can be a short lag before increases in metal costs and other inflationary impacts are fully recovered through customer pricing, which can temporarily pressure profitability. Along with the improved adjusted EBITDA results, we're also capturing stronger margins with quarterly adjusted EBITDA margins of 21% of net sales.

Speaker 3

Our year-to-date results paint a similar margin story for the segment, with 20% adjusted EBITDA margins up roughly 200 basis points versus the first three quarters of 2025. Now turning to slide 7, our Mobile Solutions segment, which covers our machine products business. Net sales for the third quarter were $68.2 million compared to $59.1 million in last year's third quarter, an increase of $9.1 million or 15%. This growth was driven primarily by higher volumes and favorable foreign exchange impacts. Across the first nine months of the year, net sales of approximately $197.9 million are up 7% versus the $184.8 million in the first nine months of the prior year. This year-to-date growth reflects continued contributions from new business awards and program launches, particularly are partially offset by certain softness in automotive markets in the first half of the year.

Speaker 3

Our third quarter adjusted EBITDA in this segment was $8.8 million, up 31% versus the last year's third quarter of $6.7 million, with the segment's adjusted EBITDA margins of 12.9% expanding 150 basis points versus the 11.4% in the prior year. Adjusted EBITDA for the first nine months of 2026 was approximately $26.8 million, compared with approximately $23.5 million in the same period in 2025, reflecting the continued improvement in both earnings and margin performance as volumes ramp and recent program launches mature. Please turn to slide 8. I want to spend a few minutes on our balance sheet as the last couple of months marks a big turning point for NN. As you can see from the chart, total net debt and preferred stock was reduced significantly from $261 million at year-end 2025 to $139 million on a Q3 pro forma basis.

Speaker 3

This represents a reduction of $122 million due to the payoff of all of our outstanding preferred stock. On our last earnings call, we detailed a significant reduction to our preferred stock outstanding as we utilized the proceeds from a successful equity issuance to address a meaningful portion of the outstanding preferred stock. Subsequent to quarter end, we were able to execute another successful PIPE transaction to redeem the remaining $35 million of preferred stock, and in doing so, capturing a $5 million discount. With that final redemption, we now have eliminated all preferred stock obligations dating back to 2021. That has been a priority for this management team, and we are pleased to have it behind us. Notably, this recent PIPE allowed NN to delever further and brought in new growth-oriented institutional investors, and we see their participation as a strong vote of confidence in our strategy and long-term opportunities.

Speaker 3

We now have more flexibility to keep optimizing the business results and take our growth to a higher level. The debt reduction and comprehensive improvement to our balance sheet has strengthened our foundation, and now our focus shifts to executing our growth strategy to achieve higher returns. Thank you. With that, I will turn the call back to Harold. Harold?

Speaker 2

Thank you, Chris. Appreciate it. Some of you that have been following us, or everyone that has been following us know that we have a multi-point growth program. We call it our 5 Pillar Growth Program. If you look at our 10-Q and note 3, which goes through our sales by segment, you will see that for the first 9 months of this year versus last year, every single segment of the company is growing, all of them. It is not really a one-segment story, but we do have some parts of the growth that we are more focused on than others, and we really wanted to bring you up to speed on some of the details here as we go through it. Data center is a big one for us. We were able to get into that business. It has grown a lot for us.

Speaker 2

It is fast-growing, and our opportunity set is fast-growing. It is really growing by leaps and bounds for us right now. Of course, we recently expanded into liquid cooling products, and that is absolutely exploding, and I look forward to talking about that in a page or 2. Defense electronics is another really good one for us. If you look at our stated results in the 10-Q and follow along with the details here, you will see that that is a big part of our year-over-year sales growth. We have a growing portfolio of products and an expanding customer base, and expanding plant certifications that we are compliant with. It has led to some recent tier 1 awards for us that are just now in the launch phase. Medical is an attractive long-term growth market.

Speaker 2

Not as fast-growing as Department of Defense, the U.S., or data center globally, but still a good one, and sticky, and it is attractive. We have had some breakthroughs this year where we have become approved supplier of multiple customers, but one really, really big one, a marquee customer that is a market in and of itself, and we have some programs that are ramping up there. Electric grid, we all know what that is. The grid in the U.S. is under stress for expansion and improvement of grid management, and we are right in the middle of that. We have strong demand across our product portfolio. Then high-value vehicle parts. That is the part of auto that we like. There is part of auto that we got rid of already in the last three years, that was negative EBITDA.

Speaker 2

We still have some parts of auto that are low margin, and we are not trying to grow that at all. We have forward plans to continue to minimize that. On the high-value side, we have some business there that is over 40% gross margins, and we are quite good at it and have been for a long time, and we are still focused on getting it. So those are the five elements of our growth program. I am going to go into each one in a little more detail. Turning to slide 10, an update on what are the numbers. The top three growth markets are data center and grid, defense electronics, and medical. Right now, those are $162 million of our run rate. Those are year to date. We have pipelines to continue growing those sales that aggregate to $270 million.

Speaker 2

Pipeline, when we talk about it on our calls, it is a quoted opportunity. We have a prospecting list that is over on top of that, but it enters a pipeline when we have quoted it and start tracking it in salesforce.com. If you look at the components, data center and grid is $87 million of our company. We have a quoted pipeline of $100 million. Defense electronics is $62 million of our company with a quoted pipeline of $85 million, and medical is $13 million of the company, and a quoted pipeline, coincidentally, of also $85 million. We are using rounding numbers here. We are rounding to the closest $5 million. You can see the order of magnitude of both the actual reported sales and the business that we are chasing. On the next page, going to go through data center grid, and then data center only.

Speaker 2

Data center and grid is a line item that is called out in our Form 10-Q, so I want to make sure I touch right back to our reported statements here. Again, with our trailing 12 quarter sales at 87, excuse me, through Q3, of $87 million. That is our second largest market already. We have quite a few products. We are on grid edge power delivery and in-rack cooling of the power system. So we are all around the electricity and the heat that it causes and the connectivity of it. We have a global prospecting list over and above the quoted opportunities that we have. In fact, it is multiples of our pipeline, and growing as we become an approved supplier. We had the new product line we came out with this year. It is absolutely going gangbusters for us. We have globalized it now.

Speaker 2

We're now quoting and doing business in Asia Pacific, in Europe, in South America, and in North America, and we're leveraging our knowhow. Now we're leveraging references with customers who are using our products. We're off and running with that one. We're adding new capacity, in China specifically, with 50 new machines. We're also adding capacity in North Attleborough, Massachusetts, for our power products. It's really growing for us. On the next page, I just wanted to talk a minute about data center only. We got that request in our last earnings call and a logical request. Wanted to say that it's $35 million right now on a run rate basis, up from basically nothing at the beginning of last year. We have a significant pipeline of quoted opportunities that are already out there, and we have a prospecting list that's several multiples that size.

Speaker 2

Our goal for this area is to get it to 100. That's 100 from virtually zero last year. It's a big move for us. It could be bigger. We're not capping it. We haven't set any caps, but we have had to set some goals for ourselves and be accountable to them. That number right now is a forward-looking management objective. It's not an estimate of current business we have in hand. There's a lot of go get to get to that number, but that is what we're tracking to. On the lower left here is our installed machine capacity to make liquid connectors. Most of you know we're underway with a ramp-up, starting from scratch. In Q3, we averaged 19 machines installed and commissioned, and Q1 will be at 55 machines, and our objective is 180 machines.

Speaker 2

We have multiple opportunities that are 100 at a time, 100 at a time, 100 at a time. We're being picky here. We're picking our partners carefully. We're picking partners we can make money with and that value what we're bringing to the table. It will be selecting from a big basket of opportunities. In the middle here is the three segments that we're going after in data center, the power infrastructure, the rack components, and the cooling system. We're not just chasing one thing. We tend to talk a lot about liquid cooling in our investor talks, but we're actually doing more than that. At this point, on the lower right here, we are shipping from four plants globally, Wuxi, China, Attleboro, Mass, North Attleborough, Mass, and Kentwood, Michigan. We'll be bringing other plants into the production cycle for this also.

Speaker 2

On the next page, I wanted to just show you our products and our machinery. In the middle here and the bottom, those are the actual machines that we have bought to make liquid cooling connector components. We're up and running. We're online. As I mentioned, in the quarter we had 17. We're on a continuing process now, ordering machines, installing, commissioning, ordering machines, installing, commissioning. It's a thing for us that we're going through. We have an ability in our current footprint to get in about 70 machines, and then we're going to need more footprint. We didn't have that amount of space open. We're also trying to get out of all the automotive business that we can as we shift the mix here.

Speaker 2

In the upper left here, you can see these are our actual products that we're making, largely made out of stainless steel specifications, different versions of stainless steel. Turned, some of them start off milled to get to a nut shape, but then turned down to get to the final shape. A lot of heat treating and processing. Abrasive flow machining, it's called, to get to the final specifications, and that's the big new product that's blasting off for us. The PCB test probe components, that's our current best seller. If you look at our 10-Q and look at the sales there, that's a big one for us. So what's that used for? When they're installing the racks, they're powering them up, they're synchronizing them to get them up and running.

Speaker 2

They have to test all the probes and test all the PCBs as they go through it, and we make the majority of the components that go into those. They do not have an unlimited life. They're used and discarded. Then electrical switch components. A lot of our switching components and terminals are being used to power the racks, and those are growing for us also. So that's our current main bestsellers that we have for data center, and the product line's expanding. If you looked at our pipeline, quoted pipeline or prospecting, we're going after quite a few different products for us. On the next page, want to turn our attention to defense electronics for a minute. That's $62 million of our trailing 12-month sales through the end of the third quarter.

Speaker 2

We've had $10 million in wins this year, and we have $85 million of quoted opportunities, and again, a big prospecting list. A couple big things for us in this business so far, year to date. We've registered a couple of our plants to ITAR and ATF levels so that we can quote unimpeded into market opportunities that we see or chase, and we've had two big products that we've landed this year. You heard us previously talk about the firearm products for a U.S. company that are titanium, which was a new accomplishment for us, and it turned out to be harder than we thought, to be quite honest. But we've conquered it. We're over the hump. It's got advanced coatings, Cerakote coatings, diamond-like coatings, as well as titanium and the welding of the titanium. We have multiple ramp-ups underway right now.

Speaker 2

It's not just one product, it's multiple products now. We recently have won a munitions contract to make munitions for the Department of Defense and NATO, and it's again, a first-time product for us. We hadn't done large-scale brass machining or multi-part machining, and we had to conquer that as well, and we have. The initial ramp-up is underway right now, and we have a large go-forward opportunity here. It's a new manufacturer of munitions for NATO, the Department of Defense, and specifically the Marine Corps. So that's a brand new product category for us that we've just entered since we last spoke. We didn't put out a press release, so you're hearing it first here, and we're underway with that. On the next page, medical. A few years ago, we were talking a lot about medical because it was part of the company's history.

Speaker 2

We sold off the medical business to correct the company coming out of COVID, and we got back into it. It was harder to get into than these other areas, but we have done it. We have done it. This year is an important year for us. We had passed some hard-to-pass plant certifications that are customer specific, and we, as I mentioned earlier, have gotten inside with a very, very large medical equipment maker who has 30 machine platforms. We have our initial POs received for the first platform, which is robotic orthopedic surgery. That is the growing area. Thanks to pickleball and all the things that happen to cause knee surgeries and ankle surgeries, elbows, people that play tennis. It is heavily rolling over to robotics, and we are right in the middle of that, making the end effectors that actually perform the surgery.

Speaker 2

That is just starting up for us. It is specialized equipment, specialized process, and specialized plant certification. In the middle here, the business is only $13 million, but this customer alone is an opportunity for us to almost triple it. We have additional quoted opportunities in the pipeline. We are quite excited about the multiple growth things that have taken root for us after multiple years of investment and hard work and bidding and correcting and sampling, and it is a very big program we have. We are launching as a company right now over 150 programs this year that are worth $100 million in annual sales. It is way more than just one thing. Again, back to the Form 10-Q. If you look at the nine months of this year versus nine months of last year, every single end market is growing.

Speaker 2

Turning to the next page, would like to turn it over to Chris, who is going to walk through our guidance for this year.

Speaker 3

Yeah. Thank you, Harold. I can hear the excitement in your voice with these new verticals and our growth strategy. As a result, we decided to raise our guidance a little bit. We had a range previously of $460 million-$480 million. We are increasing that to $480 million-$500 million with a midpoint of about $490 million. Same with the adjusted EBITDA, the dropdown. We are going to increase that range from 55-65 to now 64-68 with a midpoint of 66. That would be about a 35% increase from our 2025 actuals. Same with new business wins. You heard Harold talk about all the new business wins. We have seen a lot of the new wins feathering in this year so far.

Speaker 3

We're going to increase our new business wins midpoint as well from $80 million to $100 million to now $110 million to $130 million with a midpoint of $120 million. Obviously, this assumes our current base metal costs are relatively flat with where they're at today as well as FX rates. Turning to the next slide, just to give you a little highlight on the future, we like to put out some longer term growth targets. Our multi-year plan with our current guidance at $490 million, we're targeting $625 million in 2029 on revenue, and commensurate adjusted growth, margin growth, as well as adjusted EBITDA at $66 million targeting in midpoint right now, growing to $87 million. With that, I'd like to turn the call back over to the operator for questions. Thank you.

Operator

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask further questions, kindly rejoin the queue. Reminder, if you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Our first question comes from the line of Rob Brown with Lake Street Capital Markets. Rob, your line is now open.

Speaker 4

Thank you. Congratulations on a great quarter and all the progress. First question is on the kind of the ramp rate of all the new business wins that you've got. Could you sort of go through how that lays into the business? How many quarters it kind of takes to ramp and maybe a sense of the gross margin impact of that new business?

Speaker 2

Yeah. Thank you, Rob, for your comments. Tim French is on the phone, too, he's personally leading the ramp program. Numerically, what you're speaking about is we do have $100 million of business this year that we've launched, and then it's in ramp up mode. But we're still winning business that has not yet begun its ramp process. Going into 2027, we're doing our 2027 business plans now. And we can see what the ramps are pretty clearly in data center, in medical, and defense and the whole company. Rob, one thing that we haven't done yet is take a decision on how aggressive to be on quote, "the old legacy business" that we have. The numbers are large enough that we need to have board buy-in and talk about it when we have board meetings. So we don't have a 2027 business plan yet.

Speaker 2

Chris flashed up the long-term goals that we have for over the next few years. If you chop it down, it is about $50 million of net sales growth a year. It is about $7 million of adjusted EBITDA growth a year. Right now, I will just say, Rob, that we believe those are very achievable goals, and we will give an update that is more clear on 2027 when we have our 2027 business plans completed. Since we do not, I do not really want to have conjecture on that.

Speaker 4

Okay, great. Fair enough. You gave some great color on the data center kind of opportunity and market. How much penetration do you have in those different product lines? I think you have made good progress on the liquid cooling. Could you maybe give us a sense of how much pipeline is in some of the other product areas, and what the timing is on some of those programs?

Speaker 2

Yep. On data center, for us, for what we do on liquid cooling, there is a top 20 that matters, a top 20 customer set that matters. We have a data center meeting every two weeks. I chair it right now. I am leading data center personally, given that we do not really have a business leader of it. We have these biweekly meetings, and we are trying to get in at all 20, Rob. All 20. We have not been blocked from any of them yet. There is a decent amount of small little guys, but we are really focused in on big plays right now. We have our hands full. Tim French has been meeting with the operations team and procurement teams at these data center customers also. We are engaged with all of the top 20. In the other areas, we also have explicit prospecting lists.

Speaker 2

It is so easy to do now with AI. We are a user of AI. We use ChatGPT here at the company and trained all of our executives how to use it. With our prospecting lists that we are developing, we are using AI, and we are really seeking customers who source the products we make versus they need the product, but they make it themselves. I would say we have pretty smart prospect lists. Overall, the prospect list is $750 million right now of quoted opportunities. The pipeline, excuse me, and the prospect list is over $1 billion of additional opportunities we are tracking that are not yet quoted. For data center, it is mostly prospecting right now, so we are still working our way in to get to the firm quote stage, and we are quoting in Europe and in South America, North America, and in China.

Speaker 2

It's multifaceted, Rob, and it is not static. It's definitely dynamic. If we go to the point of a quote that we lose and it closes out with a loss for whatever reason, we take it out of the list. We're still running over a 25% hit rate. We have a floor on gross margins on new business of 25%. We're targeting 35%, and we're over 25%. We have a floor on IRR, on the return on invested capital for new business of 25%, and we're tracking over that. These are similar numbers that we've said before in the past. We haven't lowered the bar, Rob, on that, and we haven't changed the bar. We're marching to those rules. If you look at our gross margins right now, they're about 20%. Hey, Joe, can you advance to page 17, the next page?

Speaker 2

If you look at our longer-term goals on gross margin, it's on the left-hand side of the chart on page 17. It's 22% gross margin as a longer-term goal. Aspirationally, we'd like that to be 25%, and aspirationally on EBITDA, you can see in the quarter that we just had, we finished at 14% of sales on the right part of this chart. We're there, so a fair question could be, "Well, okay, what's the real number?" I think aspirationally at 25% gross margins and 15% EBITDA looks achievable, but Chris, myself, the board, we'll all update this together and give Chris 2027 guidance and an updated longer-term plan the next time we speak.

Operator

Your next question comes from the line of Greg Palm with Craig-Hallum. Greg, your line is now open.

Speaker 5

Yeah, thanks. Lauren, congrats on the progress. I feel like I'm maybe teeing up a softball here, but I am genuinely curious because I think you started the year thinking you were going to win something like in the $70 million-$80 million range of new business. You'll probably do something close to $120 million or maybe even more this year.

Speaker 5

I'm just wondering why. What is allowing you to win all this new business? You've launched a lot more programs than you thought, and I think you targeted 78 going forward, but you're much better capitalized now. So why isn't that annual target even more than that going forward, just based on what you've done year to date?

Speaker 2

Yeah, it's a good point. So in reverse order, what should the new wins number be per year going forward? You can see the guidance here. We moved it up to 120, Greg, for this year, and then your question is why shouldn't it be 120 forever or higher? I think you're right, especially given data center opportunities are bigger than we thought. Defense, bigger than we thought. Munitions, now we're in munitions. I know some. You probably follow munitions for other reasons, but we're in munitions now, and the numbers are quite staggeringly huge. So that's a reasonable request. It's probably going to be a bigger number, Greg. We'll be moving that number up. The first question you asked is how are you able to exceed the growth targets that you set?

Speaker 2

If you look at the continuum here over the last few years, we've grown our adjusted EBITDA for four years in a row. We've grown our new wins for four years in a row, and we're increasing the amount of launches that we do, and we're increasing the amount of growth capital that we're spending. So it's a continuum. We kind of saw that that might happen this year towards the end of last year, and we have the same feeling right now. I think our momentum is increasing, Greg, right now. It's not flat. It's increasing, and I'll credit a couple of our executives to that. We have a person that, I don't know if you've met him, Ravesh. He's probably on the phone. I'm going to make him blush, but he's a difference maker.

Speaker 2

Paul Wang, our leader in APAC, and his team there, Kaiyan Zhong and Lu Tao, they've chased this data center business for us. I would say we have a few key executives that have made a big difference for us, and been very entrepreneurial. Our board has allowed us to be entrepreneurial. The downside of that is our non-operating expenses or one-time expenses are a little higher than we had hoped, but it's a very small price to pay for the position that we've put ourself in. I just think that it's been smarter prospecting, using AI, entrepreneurial behavior, and letting a few of our executives go for it, and they really have the subject matter expertise. I don't think this is going to stop, Greg. I really think that we have a continuum going here in these areas.

Speaker 5

Yeah. No, it makes sense. I am going to also give you a chance to maybe talk about Q4 a little bit. We still have a pretty wide range for the full year, and I am just kind of curious, do you have any visibility into maybe some of the balance sheet, working capital on behalf of your customers, year-end positioning versus some of the newer business that is still ramping up? I guess I am just trying to get a sense for how much conservative is baked in and just from a seasonality standpoint, we are obviously still expecting a pretty big seasonal sequential decline. Maybe just some additional color behind that.

Speaker 2

Yep. Tim, get ready to pipe in here, Tim French. I can answer it generally. Yes, we are being conservative. We have kind of been that way this year. We have updated our guidance a few times, but we have always left ourself room to beat the guidance. I want you to know that our mindset is the same. We have not stopped being that way. There is conservatism in here. With regards to your request for actual facts, we do obviously know what October was, and it was really good. We have no slowdown. We have visibility into the end of the year. We have all the material we need. In the short term here, the next 8 weeks, we have the people we have, we have the material we have, we have the machines we have. We have really good visibility, and we have backlog.

Speaker 2

We have a backlog, especially in data center. The data center number could be bigger right now, but we have a backlog in China. We have a backlog in North Attleborough, Massachusetts. We are working our way through that. In the short term, we have visibility to a strong Q4. Numerically, if you look at our last several years, Q4 is usually 7% lower than the others. It is quite possible that does not happen this year, Greg, because automotive is less as a percentage of our total than it normally is. Our automotive business is even growing, if you look at the Form 10-Q, global automotive. Automotive production is flat globally at 90 million-ish kind of passenger vehicles, and in North America it is flat around 15 million. There are moving parts and a lot of talk you can get into, but we track production, and so production is fine, and that business is fine.

Speaker 2

Commercial vehicle is strengthening for us, so we have that legacy market that is actually getting stronger, and we are layering on top of it our wins. We are not expecting any slowdown, Greg, to happen. The thing is, since we are a tier 2 guy, we cannot control our sales. We are a taker on our sales, so we get pull signals. That is us. We cannot control the sales, and we cannot stuff the channel. I would just say that we are being conservative right now because we cannot control that outcome, but no signals have been given to us right now to slow down. The signals that Tim has right now are, "I want more." Tim is on the phone. Tim, I will turn it over to you for a minute. You are on mute, Tim. All right. That did not work, Greg, sorry.

Speaker 5

That's all right. I think you covered it. I'll leave it there. Thanks.

Speaker 2

Thank you, Greg.

Operator

Your next question comes from the line of George Proost with Noble Capital Markets. George, your line is now open.

Speaker 6

Hi, this is George Proost. I'm filling in for Joe Gomes this morning. You guys mentioned that you guys have a pipeline backlog in China, and I was kind of wondering if there would be any sort of decision that would drive to expand capacity there.

Speaker 2

Yep. Good question, George. We won a big chunk of business this year to make components for the NVIDIA supply chain, and we put out a press release on that, and it was a part of our investor deck when we went and did our PIPE. The equipment that we need to produce the parts, we had to order it, and the equipment has a lead time itself. We are subject to the equipment lead times, the installation and validation. There is a strict process that is followed called PPAP, and that cannot be truncated or shortened. It has a timeline to it. We are underway ramping up about 55 new machines. They are on the way, they are not all here. It goes into Q1 of 2027.

Speaker 2

But as I kind of gave some forward thinking here this morning, that we are headed to 180 machines, so it is a continuum, and there is go get in saying that number because we are prospecting and quoting and need to win business in order to keep filling those machines. We are underway with it, and we are getting good at it, and we are in that business now, so we are feeling comfortable about it. So we foresee ourselves adding capacity all the way through 2027, not just right now. We view this as a continuum for us.

Speaker 6

All right. Thank you.

Speaker 2

You are welcome. Christine, Tim French sent me a note that for some reason his phone is on mute. If you can unmute him.

Operator

Yes. I believe he would just have to unmute on his device, because right now

Speaker 2

Thank you. Okay.

Operator

I will assist with it. In the meantime, our next caller comes from the line of Robert Sussman with Bentley Capital. Robert, your line is now open.

Speaker 7

Yep. Thank you. My first question is, you said nothing on the call about cable assembly, but you announced that new business and even indicated you are going to open a plant in Mexico. Can you talk about the prospects for that and how large an investment is required and what commitments you have?

Speaker 2

Yes. Thank you for the question, Robert. That will help the 2027 numbers for sure. Right now it's an investment program. We are launching our Juarez plant first with a machined product. I could send you pictures of the first machines that are in there. They're installing machines. It's underway. Cable assembly's going to be second inside of that plant. We've ordered the machines. We don't have any yet, to my knowledge. We have machine lead times we're dealing with. We expect to get the machinery for both the machine parts side, and we have a launch customer there, and the cable assembly side at the end of this year and beginning of next year. We will be completing the ramp-up during Q1. When we give 2027 guidance, we will be giving guidance for what we expect out of that plant in 2027 and going forward.

Speaker 2

We're not ready to release those figures just yet, Robert.

Speaker 7

Understand. A follow-up. This is for Chris. What should be the tax rate in 2027 for both book and tax?

Speaker 3

Well, we are not in a tax paying situation. We have a very large tax loss deferral. So our cash taxes are very small. They're in the $4 million-$5 million range. So on a percentage basis, it's very tiny. We expect to be in a tax loss deferral situation for the next couple of years because of all the losses that the company had in previous years. So I would say we're going to continue to be a cash taxpayer just for Foreign repatriated dividends and other non-U.S. taxes, as well as franchise taxes in the U.S. So it's a very small number.

Speaker 7

What will be your book tax rate, though?

Speaker 3

Globally, our book tax rate, like I said, it will be about $4 million or $5 million cash taxes. That is what I would expect over the next couple of years.

Speaker 7

It is a very, very low book tax rate as well as actual paid taxes.

Speaker 3

Correct.

Speaker 7

Okay. One comment, if you do not mind. It sounds like these estimates for 2029 revenues are way low. You are talking about increasing revenues $40 million each year, and when I listen to your opportunities, that is a very, very low number. I know that you are always conservative, but it seems to me to be extremely low.

Speaker 3

Well, the off call on that, Robert, is how fast do we want to deal with automotive sales that are dilutive to the company? Automotive is about $200 million of our $500 million sales, just using round numbers here. And we have closed a couple plants that the entire plant lost money, but we still have about 10 automotive customers that are right around zero gross margin. And we have working capital tied up to keep them happy. They take salespeople to keep them happy, et cetera. So we are planning on curtailing those customers over time. Not all in one big fall off so that we have some big thing we got to talk about, but we are planning on curtailing our business with them. The first move obviously is go and say, "Okay. Here's my new price that I need to continue to be your partner. Okay?

Speaker 3

I know we have been partners for 20 years, but it doesn't work that well for us, and here's what it's going to take for us to stay in the game." Some people engage on that, some people won't. Tim and I spent a lot of time on that, including this week. So that's the offset, Robert, to the gross number. So you are correct that if the wins were just completely additive, that the number's higher. You are correct about that. But the takeaway is us shedding this automotive business that doesn't make sense. And we are committed to doing that. We are committed to making that a smaller number, and that's board level talking, right? So we have been on a shedding plan, and it is getting smaller, but that will be part of our 2027 guidance when we give it.

Speaker 3

And we will take a point of view on how much of the automotive business we want to get rid of.

Speaker 7

I endorse that plan totally. And if your sales grow a little slower because you are getting rid of very low margin business and replacing it with high margin business, I would be thrilled. Great job. Thank you.

Speaker 3

Thank you, Robert. Thank you.

Operator

Your next question comes from the line of Barry Haimes with Sage Asset Management. Barry, your line is now open.

Speaker 8

Thanks so much and congrats on the great results. I had a couple of questions. One had to do with the win rates. You mentioned over 25%. Does that vary much by the three major segments? As you have gotten further into some of the new segments like medical, do you see that rise over time? Then I think you said $750 million of pipeline, which is quoted business. So if we take the win rate, that would imply for next year, new business wins could be $150 million-$200 million. Am I doing the math right? Then just a couple of questions on the auto business that you were just talking about. What is the timing on when those contracts typically reprice? How soon in the future would that happen?

Speaker 8

To the extent you exited some of that business, are some of those machine tools movable to some of the other end markets, or are they unique kind of one-off and would have to be written off? Thanks.

Speaker 3

Thank you. Tim, you are going to have to help me. Barry, I think you asked four questions. On the win rates, yes, they do vary by area. Yes, sir. Our win rates are turning out to be quite high in data center. High. Our win rates in defense are turning out to be high. We do not think we are actually a better supplier in those arenas. We think there is a higher need for supply. Both markets are supply limited, and therefore people that are available and know what they are doing and can make the products are welcomed in to begin producing and supplying. So there is a natural draw. Medical is harder to get into. It is a risk-averse market. It is slow-growing. They have suppliers already. You are waiting for someone to fail. It has been harder to get into kind of a static situation and

Speaker 2

Tim tracks the win rates by area, and our win rate metric, just to be transparent on that, is on closed opportunities. When the opportunity is closed and a winner is selected, we track how many we won, how many we lost. Tying into your question that you asked about on the size of the opportunity versus the quoted pipeline, not all opportunities that are in the pipeline will close out in 2027. We are working on multiple programs that cross multiple years, and so the wins this year were not all quoted this year or even last year. They have a gestation period that they go through. So, I think we will continue to hover around a 25%-28% win rate on closed opportunities.

Speaker 2

This gets back to the question that Greg Palm asked also is, "Hey, seems like we are able to pull off $120 million of wins from the pipeline versus $80 million." And he is correct. So I think it is going to stay a number like that, Barry. On the auto contracts, how much lead time? It varies by agreement. Very few are longer than 12 months. But there is usually about a 12-month heads-up that you can give that this is not working. With regards to price negotiations, we have the right to go and argue for price compensation for basis cost changes like steel. We have a dynamic environment for pricing conversations as you go through an agreement. But they still have the right to say no, and all contracts have a meet comp. So their pushback is, "Hey, I know that what you are saying is true. It all makes sense.

Speaker 2

It is logical. You guys are really smart, but you have to meet comp, and I have someone that is willing to do it at the current price, so you can take it or leave it." So it is an old-fashioned negotiation. We just have too many that are ending up in zero. We are going to be taking that down over time. And yes, a lot of the equipment can be repurposed to make the products that are growing, especially defense and especially munitions. Yeah.

Speaker 8

Great. Thanks so much.

Speaker 2

No problem.

Operator

Our last question comes from the line of Greg Palm with Craig-Hallum. Greg, your line is now open.

Speaker 5

Yeah. Thanks for taking the follow-ups here. I know you're not wanting to comment specifically about 2027, but are you willing to endorse that $50 million incremental revenue in fiscal 2027 over 2026? I just want to be clear because you've, I guess, referenced that number a couple of times.

Speaker 2

Greg, I would just say we're very comfortable with our long-term guidance. We made it on purpose. We did look at the incremental years of estimates, and they're in the ballpark. Yeah.

Speaker 5

Okay. All right. Then I guess my other question just on M&A, because I don't think we talked about that, but just given the balance sheet, you're much better capitalized now than you have been, and you've talked about that a little bit. So I don't know. In a perfect world, what does an ideal acquisition bring you? I mean, is it more capacity? Is it capabilities? Is it new customers? Maybe you can just talk a little bit about your appetite there.

Speaker 2

Yeah. So we have one that we like right now. Their customer base is medical and defense. They have machines like us made by the same people, INDEX machines. They have some capabilities that we don't have to do what's called gun drilling, and then they have multi-axis EDM machines, which we don't have. So it's capabilities and customer roster expansion into the areas that we've already selected. So we're not looking to get into new areas per se. We're really looking at how to continue our quest to get bigger in these end markets, the 5 pillars. And can someone bring a customer roster to us? Can someone bring some know-how to us? And are they willing to sell at a multiple that's accretive to our company? So it's got to be all three of those, Greg.

Speaker 5

All right. Makes sense. Thanks.

Speaker 2

Thank you very much. Christine, thank you for hosting the call. Thank you everyone for calling in today, we appreciate it. We look forward to delivering the quarter that we are in and speaking about 2027 when we have clarity over our commitments that we want to make. I want to thank our advisors, some who are on the call today, who helped us get through six separate transactions over the last four months and create a new one, that is going to be unleashed to create value at a higher level. So thank you everyone for being on the phone today. With that, we will end the call.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.

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